Kicking off proceedings on Day 2 at Gaim International 2012, Tushar Patel of HFIM moderated a panel to discuss today’s seeding environment and how different seeders approach the investment process. Sitting on the panel were Patric de Gentile Williams of FRM, Mona Aboelnaga Kanaan of Proctor Investment Managers, Jeroen Tielman (pictured) of seeding platform IMQubator, and Philippe Paquet of Newalpha Asset Management.
In response to why investors allocate to seeders like FRM, de Gentile Williams gave two reasons: to gain exposure to early stage emerging managers for targeted sources of alpha, and also because seed investing gives investors a substantial additional source of return. Tielman, whose firm IMQubator is pure end investor-orientated, said that institutional investors being exposed to seeing opportunities was interesting because it enables them to closely align themselves to managers at a time when their motivation to succeed is at its highest.
“If an investor allocates to an experienced team they know that team will do everything they can to generate returns. Another benefit to seeding investing is that it gives investors access to multiple income streams,” said Tielman.
Proctor Investment Managers takes a true private equity interest in managers, investing in the fund management company rather than the funds themselves like IMQ. “We are long-term investors and strongly believe managers should be in control of their business. We don’t look to take an overpowering equity stake,” confirmed Kanaan.
Paquet added that another reason clients like seed investments is because of the market intelligence seed firms can offer. “Clients such as insurance companies appreciate finding out about start-ups being launched by seasoned professionals who have a clear idea of how to make money,” said Paquet.
Different seeders look for different things. Firms like FRM invest in groups whereas IMQ invests in individuals. Said de Gentile Williams: “We prefer to back groups of people who’ve worked together for a number of years rather than individuals.”
Tielman said IMQ has a two-pronged approach to sourcing managers: the people themselves, and technical considerations such as ensuring the strategy has ample liquidity.
“Where we are super focused is on the actual business itself. Are these managers true institutions rather than small shops with limited scalability? We focus on the P&L, capacity, how the teams work together and how they are compensated,” said Kanaan.
The panel conceded that today’s capital raising environment is tough for managers and seeders alike, but there are signs that momentum is building. “Over the past 12 months we’ve been more productive at capital raising than the previous five years. We’re signing an insurance company mandate tomorrow,” confirmed Pacquet. De Gentile Williams said that investors are actively allocating to FRM’s underlying managers but added: “The hardest thing for managers is getting access to investors, to get their attention and get invited in to pitch.”
“Since the global financial crisis our pipeline has changed from being 50/50 traditional/hedge fund managers to being predominantly larger hedge fund managers. In addition to the capital we put into firms we’ve been active in marketing to help managers grow in today’s difficult environment,” confirmed Kanaan.